'Dollar peg has served region well'

United States Treasury Secretary Henry Paulson said on Saturday the dollar peg for currencies in the Gulf states had served the region well and any changes to the link would be a sovereign matter.

Dollar pegs in all Gulf Arab states except Kuwait force their respective central banks to match US interest rate cuts, and have helped fuel inflation as their economies are booming due to record oil prices. This also reduces their purchasing power for goods denominated in other currencies.

Asked about his concerns over the dollar peg, Paulson, on a visit to Saudi Arabia, Qatar and the UAE, told a news conference: "That is a sovereign decision… The dollar peg, I think, has served this country [Saudi Arabia] and this region well. That speaks for itself."

Qatar's top economic policy adviser Ibrahim Al Ibrahim was quoted late on Friday as saying Qatar must de-link its currency from the dollar peg.

But Saudi Finance Minister Ibrahim Al Assaf, who joined Paulson in the news conference after a series of meetings, reaffirmed his commitment to the dollar peg.

"We have no intention of depegging or revaluation," Assaf said. "As Mr Secretary [Paulson] said… it's a position that has served us well. The peg to the dollar has served us well so far and we look at the long-term interest of Saudi Arabia."

Turning to the price of oil, which hit a record high of more than $135 a barrel last week, Paulson reiterated his calls for additional investment in oil producing countries, particularly from foreign sources, to help increase production. "There is no doubt that the current prices are a burden on economies around the world and a burden on people around the world," he said.

Assaf agreed, saying Saudi Arabia was investing billions of dollars to increase both upstream crude oil production and downstream refining capacity to help meet international demand.

"We don't like these extreme volatilities in the [oil] market. They are not good for the consuming countries and they are not good for the producing countries."

The visit to the region offers the treasury chief the opportunity of an update on the fixed exchange rates retained by most of the oil- rich nations in the region.

Gulf officials in April agreed to strengthen their efforts to establish a currency union by 2010, diminishing speculation on a quick change in the dollar pegs.

"The dollar peg has been agreed as a preamble to the formation of a monetary union and abandoning it now will further damage the credibility of the whole project," said Dorothee Gasser, a currency analyst at ING Bank NV in London.

Switching to setting rates versus a basket of currencies, rather than just the greenback, "can't be done overnight" from a logistical view, Gasser said.

Forward agreements to acquire Gulf currencies have fallen as investors bet the nations, including Saudi Arabia and the UAE, will keep their pegs for now.

Contracts to buy UAE dirhams in one year dropped to 3.59 per dollar yesterday, a two per cent premium on the spot price of 3.6729, according to Bloomberg data.

Twelve-month forwards for Saudi Arabia's riyal slipped to 3.7 versus the US currency, compared to the spot rate of 3.7506. The forward rate has dropped from 3.7803 on January 12, the highest this year.

"Currency decisions are sovereign decisions," David McCormick, treasury undersecretary for international affairs, told reporters in Washington on May 28. "It appears that the peg in the Gulf states has served those countries well."

Paulson plans to tout the US as an investment destination for the Gulf funds flush with $4 trillion as the region benefits from oil prices that have doubled in the past year.

'Qatar should delink'

Qatar has to delink its currency from the weakening US dollar as the country's economy is growing, an economic policy adviser said in published remarks.

"We have to delink," Ibrahim Al Ibrahim was quoted as saying by the London-based Meed. "It does not make sense to stay linked to a currency that is declining while our economy is growing. At a time when our currency should be going up, it is going down."

Ibrahim, economic adviser to Emir Sheikh Hamad bin Khalifa Al Thani, said he is "working hard" to convince the government that keeping the peg is not in its interest, but that any action should be taken in co-ordination with other Gulf states. "The problem is really how to deal with Gulf countries in terms of the objective of having one currency," he said. (Reuters)